Richard Melson

November 2005

"Tired of Globalization"


Trade and poverty

Tired of globalisation

Nov 3rd 2005

From The Economist print edition

But trade liberalisation and other forms

of openness are needed more than ever

FREDERIC BASTIAT, who was that rarest of creatures, a French free-market economist, wrote to this newspaper in 1846 to express a noble and romantic hope: "May all the nations soon throw down the barriers which separate them." Those words were echoed 125 years later by the call of John Lennon, who was not an economist but a rather successful global capitalist, to "imagine there's no countries". As he said in his 1971 song, it isn't hard to do. But despite the spectacular rise in living standards that has occurred as barriers between nations have fallen, and despite the resulting escape from poverty by hundreds of millions of people in those places that have joined the world economy, it is still hard to convince publics and politicians of the merits of openness. Now, once again, a queue is forming to denounce openness—ie, globalisation. It is putting at risk the next big advance in trade liberalisation and the next big reduction in poverty in the developing countries.

In Washington, DC, home of a fabled "consensus" about poor countries' economic policies, a bill before Congress devised by one of New York's senators, Charles Schumer, threatens a 27.5% tariff on imports from China if that country does not revalue its currency by an equivalent amount. In Mr Schumer's view, presumably, far too many Chinese peasants are escaping poverty. On November 4th George Bush will escape the febrile atmosphere along Pennsylvania Avenue by visiting Argentina to attend the 34-country Summit of the Americas. There he will be greeted by a rally against "imperialism", by which is meant him personally, the Iraq war and the Free Trade Area of the Americas which he espouses. Among the hoped-for 50,000 demonstrators will be Diego Maradona, who as a footballer became rich through the game's global market and as a cocaine-addict was dependent on barrier-busting international trade; and naturally his fellow-summiteer, Hugo Chávez, who is using trade in high-priced oil to finance his "21st-century socialism" in Venezuela.

All, perhaps, the normal fun of a Latin American visit. Last week's Latinobarómetro opinion poll revealed that whatever the protesters may say, a clear majority in all the region's countries favour a market economy rather than a closed, state-directed one—even in Venezuela (see article). This is, however, a difficult moment for the market economy and for relations between rich countries and poorer ones, for the Doha round of trade-liberalisation talks under the World Trade Organisation are in trouble. When it began in 2001, the round was billed as a big effort to boost growth in poor countries, and the lowering of barriers to food trade was placed at its centre. In the past few weeks, however, a fairly bold American proposal for reducing its farm protection has been greeted by a much weaker response from the European Union and none at all from Japan. And ministers from Bastiat's own country, France, have vied with one another to denounce all talk of further reform to the EU's common agricultural policy. Europe must, they say, remain an "agricultural power" even at the expense of the taxpayer and the poor, and, according to President Jacques Chirac, must fight back "liberalism". Whatever happened to Liberté, Egalité, Fraternité?

The world will find out, to some extent, next month when ministers from the 148 countries in the WTO meet in Hong Kong. The last time they gathered for such a crucial meeting was in September 2003 in Cancún, and the result was a shambles. There was a bitter row between rich countries and poor ones, and the meeting broke up in acrimony. At that stage, however, there was still plenty of time to repair the damage. For in effect the deadline for the Doha round comes in June 2007, when the trade-negotiating authority granted by Congress to President Bush expires. But, although that leaves more than a year and a half after Hong Kong, the complexity of a negotiation involving 148 countries and scores of highly technical issues means that the deal really needs to be done during 2006, with the political framework for it set early on—which essentially means in Hong Kong.

The case for selfish generosity

Trade-liberalisation rounds are arcane affairs about which free-traders are often thought to cry wolf. The previous talks, known as the Uruguay round, went through lots of brinkmanship and delays before they were completed. The result was still disappointing in many ways, especially to developing countries, and yet since the round's completion in 1993 the world economy has grown lustily and the biggest developing countries, China, India and Brazil, have all burst on to the global trading scene. Would the world really be hurt if the EU merely refuses to expose its farmers to more competition?

The likeliest outcome both from the Hong Kong meeting and the eventual Doha agreement is a compromise—as always. The European position is feeble but not risible, for it has offered an overall average cut in its farm tariffs of 39%, up from 25% only a month ago, though with rather a lot of loopholes that could severely limit the benefits. France, and other European farm protectionists, may prove more flexible than they currently imply: this is hardly the first time they have promised to man the barricades shortly before striking a deal. Yet though some sort of fudge in Hong Kong must be likely, with the Americans lowering their ambition and the Europeans raising theirs a little, such an outcome would still represent both a missed opportunity and a risk.

The missed opportunity is that Doha has offered the first proper chance to involve developing countries in trade negotiations—they now make up two-thirds of the WTO members—but also thereby to use a full exchange of agricultural, industrial and service liberalisations to make a big advance in free trade that could benefit a wide range of countries. Some of that progress may still be made, even in a fudged deal: Brazil, for example, stands to benefit hugely from freer trade in agriculture (see article), so it should be willing to promote other concessions in return. India is reluctant to cut its own farm tariffs but has a big interest in liberalising trade in services, wanting more freedom in everything from finance to health care to entertainment. But if the rich world could gird itself to be more ambitious on agriculture the gains would be even greater: help for the poorest countries, making the rich look generous; better access to the biggest and richest developing countries for western companies; and a rise in global income in a decade's time of $300 billion a year (says the World Bank), which would thus help everyone.

The risk is that failure to agree on a new wave of openness during a period (the past two years) in which the world economy has been growing at its fastest for three decades, with more countries sharing in that growth than ever before, will set a sour political note for what may well be tougher times ahead. A turn away from trade liberalisation just ahead of an American recession, say, or a Chinese economic slowdown, could open up a chance not just for a slowdown in progress but for a rollback. Currently, for example, the Schumer bill to put a penal tariff on Chinese goods looks unlikely to pass. If American unemployment were rising and world trade talks had turned acrimonious, that might change. So might the political wind in many developing countries.

If so, that would be a tragedy for the whole world. Although the case for reducing poverty by sending more aid to the poorest countries has some merit, the experience of China, South Korea, Chile and India shows that the much better and more powerful way to deal with poverty is to use the solution that worked in the past in America, western Europe and Japan: open, trading economies, exploiting the full infrastructure of capitalism (including financial services—see our survey on microfinance) amid a rule of law provided by government. In other words, globalisation. To paraphrase Samuel Johnson, anyone who is tired of that is tired of life.

The Economist Newspaper Limited 2005

November 5, 2005